Considerations about interest rates
The results of the preceding chapters can be summarized as follows. If the savings of the households are insufficient to enable firms to accumulate capital to the point where the technology frontier is reached then the interest rates on loans are bid up to a level that is determined by the relation between the marginal productivities of labor and capital. At the other extreme, if credit is overly abundant then the economy attains its technological limit and the interest rates on loans approach a level that is determined by the time preference of the households and the mark-up requirements of banks. In that case labor is the limiting factor for output and wages are bid up to the point where Equation (6.2) becomes binding. Independent thereof, the interest rates on savings always adjust to the time preference of the households. It shall be emphasized that none of these outcomes is assumed. They are rather the results of a consistent modeling of price formation as a market process.
KeywordsInterest Rate Time Preference Marginal Productivity Physical Productivity Price Formation
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